Sometime in 2012, during the runup to Windows 8, I was on a call with a Microsoft Developer & Platform Evangelist (DPE) strategizing how we would approach a particular partner.1 I asked his opinion of a specific feature in this partner’s iPad app, and was shocked at his response:
“I don’t own an iPad, and never will. I’m a Microsoft man.”
The most common, almost universally accepted reason for company failure is “the stupid manager theory”. It’s the corollary to “the smart manager theory” which is used to describe almost all company successes. The only problem with this theory is that it is usually the same managers who run the company while it’s successful as when it’s not. Therefore for the theory to be valid then the smart manager must have turned stupid at a specific moment in time, and as most companies in an industry fail in unison, then the stupidity bit must have been flipped in more than one individual at the same time in some massive conspiracy to fail simultaneously.
So the failures of Microsoft to move beyond the rapidly evaporating Windows business model are attributed to the personal failings of its CEO. The calls for his head have been getting loud and rancorous for years. Taking this theory further, now that he’s leaving, the prosperity of the company depends entirely on the choice of a new (smarter) CEO.
It’s all nonsense of course.
In general, I agree. What has befallen Microsoft over the last half-decade is a fundamental shift from desktop to mobile, and contrary to most commentary, there is no particular reason to think that Microsoft “missed” mobile. As I wrote in Microsoft’s Mobile Muddle:
Saying “Microsoft missed mobile” is a bit unfair; Windows Mobile came out way back in 2000, and the whole reason Google bought Android was the fear that Microsoft would dominate mobile the way they dominated the PC era. It turned out, though, that mobile devices, with their focus on touch, simplified interfaces, and ARM foundation, were nothing like PCs. Everyone had to start from scratch, and if starting from scratch, by definition Microsoft didn’t have any sort of built-in advantage. They were simply out-executed.
You can, of course, pin the lack of execution on Ballmer, but any fair ascription of blame falls not only on him, but on thousands of other employees, not to mention just about every other tech company in the world, including companies like Google and Samsung.
What made Google and Samsung different from Microsoft (and Nokia and Blackberry and many others) was the speed with which they recognized that the world had changed with the launch of the iPhone. Setting aside whatever distaste you may have about features that Android and Galaxy phones borrowed from iOS and the iPhone, the fact remains that Google and Samsung are the only two companies who were relevant in 2007 who are still relevant today. It turns out seeing and accepting reality are powerful differentiators.
Steve Ballmer, on the other hand, “liked his chances”:
I know this clip has been played to death; I was hesitant to even include it for that reason alone. And I also get that a CEO has a certain responsibility to talk up his company’s prospects. But the consequence of statements like this, and the general arrogance endemic of a company that has forgotten why it succeeded in the first place, results in rank-and-file like the evangelist I spoke to – who, to be clear, was very smart and a very hard worker – who wouldn’t even touch an iPad.
This is the power CEOs have. They cannot do all the work, and they cannot impact industry trends beyond their control. But they can choose whether or not to accept reality, and in so doing, impact the worldview of all those they lead.
This is why it matters that the first public event Satya Nadella appeared at was Office for iPad. This is why it matters that Microsoft released it even though the Windows Touch version wasn’t finished. This is why it matters that Microsoft gave up the pretense of Windows Phone license payments that were already effectively zero2 and simply made it free.
Microsoft is by no means in the clear. There is still that whole matter of execution, and an industry that is moving away from the PC. But accepting reality is the necessary first step in fighting back, and it seems Nadella has passed that test with flying colors.
I was a category manager for the Windows Store, dealing with top partners directly, and giving direction to our DPE colleagues who were “boots on the ground” all over the world ↩
Microsoft was paying OEM partners marketing development funds that basically made up for licensing costs ↩
An analyst at R.W. Baird has a report out claiming that Tableau is a threat to replace Excel:
Shares of data visualization software maker Tableau (DATA) are up $2.74, or 3.6%, at $78.82, after R.W. Baird’s Steven Ashley raised his rating on the shares to Outperform from Neutral, with a $95 price target, writing that his conversations with channel partners “further validated Tableau’s disruptive nature.”
Tableau’s market, rather than the $12 billion in so-called business intelligence, rather its as big as the market for Microsoft’s venerable Excel
What is interesting about this is that Tableau is not disruptive according to the traditional definition, meaning, it’s not a low-end product. It’s actually more powerful than Excel in a lot of ways. The problem for Microsoft, though, is that Office, which itself was originally a low-end product, has by and large retreated into the high-end and sells to a highly-informed and price-insensitive customer. This is the exact sort of environment where a competing product can win on features, particularly as new jobs to be done arise, in this case, analyzing massive data sets.
I don’t know enough about this market to say whether or not this analyst is right, but the market conditions are there for a sudden collapse.
I’ve written previously that “Targeting information is the new scarcity in advertising.” The Information has a perfect example of exactly that:
Mobile app developers that rely on highly targeted ad campaigns to bring in new business are facing rising rates and inventory shortages as they compete to reach a small group of desirable, free-spending customers.
Companies including SGN, Groupon and Big Fish Games all say the supply of desirable mobile advertising options can run too thin. The squeeze is driving up prices, and is one of the reasons that Facebook and Twitter are each exploring the creation of advertising networks that could target people outside of the social networks themselves.
New advertising options alone, though, may not solve the problem for mobile app developers, who industry executives say are the biggest buyers of mobile ads. That’s because they’re on the hunt for something very specific: A customer who will either download an app, or spend money in an app that she might already have.
When app developers figure out who she is and how to target her, they will spend heavily on ads—though only to a point. If prices get too high, or if there simply aren’t enough people in the target market and the advertiser is forced to broaden the focus, the cost-effectiveness of the ad campaign can deteriorate rapidly.
“If you’re looking at data-targeted or behavioral-targeted advertising, when you start to get very specific about the audience you are trying to reach it does reduce the supply significantly, the more granular you get,” says Patrick Dolan, executive vice president of the Interactive Advertising Bureau. “A lot of times when you’re looking for a very specific audience its very hard to scale because that audience is not as big.”
Dumb ads that rely on nothing more than page views are worth basically nothing; after all, there is an infinite supply. But what makes Facebook so compelling to an advertiser is that they can consistently deliver ad spots that target very specific niches that have a high conversion rate. This is rare, and it’s expensive, and it’s one of the big reasons that Facebook’s financial results have been killing it lately.
It’s also a big advantage that Facebook has over Google; Google can serve you an ad when you’re already looking for something, but Facebook can serve you an ad for something you didn’t even realize you wanted.
Over the past year, T-Mobile’s new policies have ushered in a new wave of changes to the way the US wireless industry works. It was the first national operator to introduce phone-financing plans, early upgrades and free international roaming; additionally, it also offers to pay your cancellation fee if you break another carrier’s contract to move over. It appears that such practices must come at a cost: CEO John Legere announced that beginning April 1st, T-Mobile will no longer offer its Advantage Program, which features monthly employer rate plan discounts, to new customers. Existing beneficiaries will see the deduction removed from their accounts on April 25th. As a consolation, affected subscribers will now receive a $25 reward card every time they get a new phone.
On one level that makes sense, but I think there might be something more sophisticated going on here. T-Mobile almost certainly has fewer corporate contracts than do AT&T and Verizon especially; on the flipside, these discounts are yet another form of carrier lock-in. Once you get a discount, you basically have it forever – the carriers never re-verify – but if you switch carriers, you need to re-apply.
Given this, it would be better for T-Mobile if these discounts went away everywhere. It’s not clear, though, how T-Mobile’s actions will put pressure on their competitors like their other actions, which had a clear benefit to potential customers.
Let’s get one thing out of the way: there is nothing about Box’s S-1 filing that suggests tech is in a bubble. Indeed, the fact Aaron Levie and company are not yet profitable is a good thing.
There are certain topics that even some of the best journalists can’t fully grok. One of them is profitability. I find it amusing when a journalist writes an article about a prominent startup (either privately held or preparing for an IPO) and decries that, “They’re not even profitable!”
I mention journalists here because they perpetuate the myth that focusing on profits is ALWAYS the right answer and then I hear many entrepreneurs (and certainly many “normals”) repeating the same mantra.
There is a healthy tension between profits & growth. To grow faster businesses need resources in today’s financial period to fund growth that may not come for 6 months to a year.
The basic gist is that in situations where costs come before revenue (like, say, a sales force for selling to enterprise), chasing growth over making money increases the amount of long-term profitability. Seriously, read the whole thing.1
Suster’s article was not about Box specifically; for that I refer you to Dave Kellogg’s piece, Burn Baby Burn: A Look at the Box S-1. He concludes that the Box numbers are very reasonable and that the business is scaling well:
In many ways you see a typical “go big or go home” cloud computing firm, burning boatloads of cash but acquiring customers in a reasonably efficient manner and doing a nice job with retention/cross-sell/up-sell as judged by their retention numbers. When you look big picture, I believe they see themselves in a winner-take-all battle vs. DropBox and in this case, the strategy — while amazingly cash consumptive — does make sense.
It’s a great analysis, and I also very much recommend it, but I think he got one thing wrong: Box isn’t (just) focused on beating Dropbox in storage. In fact, they are making a play to be the new Enterprise platform, and that means taking on Microsoft.
Windows: The Old Platform
Back when all computers were PCs, the dominant platform was Windows. Office obviously ran (better) on Windows, but so did an untold number of 3rd-party apps and custom-build line-of-business (LOB) apps. Considering the fact that enterprises bought most PCs, this meant Windows dominated.
Windows was the platform that mattered in the PC era
The browser began to break this hegemony apart,2 especially when it came to LOB apps, but the true fracturing has happened in just the last few years with the advent of smartphones and tablets. Now, only a portion of computing devices run Windows:
While this chart covers the entire industry, it’s reflective of what is happening in the enterprise as well. Multiple devices with multiple operating systems are in daily use, but, at the end of the day, they all need to access the same data.
Enter Box.
Data: The New Platform
Pure storage isn’t a great business. The cost is trending towards zero, as noted by Levie himself:
Just as you don't worry about database rows when using Twitter or bandwidth on Youtube, cloud storage will eventually be free and infinite.
Data, though, is priceless; it can’t be replaced, and it’s the essence of what makes a particular organization unique. For this reason, and for regulatory ones, there are all kinds of specialized controls that IT departments need for data. This is where Box has worked diligently to differentiate themselves from consumer-focused competitors like Dropbox (for more, see my article from January Battle of the Box).
At the same time, Box has embraced smartphones and tablets, building and updating apps on all the platforms, often well before competitors. This results in a service that looks something like this:
By handling the data that needs to be available everywhere, Box is well-placed to be the new platform
This image explains why the arguably more significant news from Box last week was not the unveiling of their S-1, but rather the first Box developer’s conference. Just because the operating system is no longer the platform does not mean that the need – and opportunity – for a platform does not exist. Something needs to tie together all those computing devices, and data, which needs to be everywhere, is the logical place to start.
This ups the stakes considerably. Platforms are multi-sided; in the case of Box, they need to have all the data, serve all the devices, and, most critically, have developers. Developers, though, are very pragmatic: they care about opportunity, and opportunity is a function of market size and ability to monetize. The latter is much less of an issue in the enterprise as compared to the consumer, which leaves scale as the most important differentiator from a developer perspective when they decide which platform to support.
Spending a whole lot of money to scale quickly suddenly doesn’t seem like such a bad idea.
The Microsoft Trump Card
Last week, though, was not all good news for Box; on the same day as their developer conference, Microsoft held its own event to announce Office for iPad. Until now, Microsoft has been largely absent from the iPhone and especially the iPad, leaving some of the most important enterprise data – Office docs – available on basic viewers or 3rd-party editors only. This worked in Box’s favor, as their excellent iPad support made Office docs accessible, if not particularly usable.
Office for iPad, though, is designed to work exclusively with Microsoft’s cloud services. Now, the best solution for dealing with Office docs anywhere is to use Microsoft’s data layer. In this way Apple’s sandboxed approach and lack of inter-app communication is working very much in Microsoft’s favor; you can open files stored in Box or other Cloud services with the Office apps, but the communication is one-way. Any changes you made can only be saved to your iPad or to your Microsoft cloud account (OneDrive, OneDrive Pro, or SharePoint).
To be clear, SharePoint is a pain to use, particularly for end-users, and especially relative to Box. Less-than-full access to some of your most important data, though, is very painful as well, and it’s here that Microsoft just played their trump card. Office still matters for a whole lot of businesses, and the best Office experience is only available in conjunction with the Microsoft cloud/platform.
Does Office Matter?
The opportunity that Box is pursuing is the exact reason I have been so outspoken about Microsoft’s misplaced devices strategy. Steve Ballmer and his Windows obsession missed the fact that operating systems as a whole were increasingly irrelevant; Satya Nadella, whose background is in Microsoft’s cloud business, is actually pursuing the same old Microsoft strategy – use Office to prop up the Microsoft platform – he’s just leveraging it for the platform of the future, not the past.
What is tricky is that future almost certainly includes fewer and fewer Office documents; the degree to which enterprises have transitioned away from ready-to-print documents to constant communication and collaboration will determine if Microsoft’s new strategy is successful – and, by extension, the degree to which Box realizes the growth they have so extravagantly invested in.
James Bright made charts to better illustrate some of the concepts made in Suster’s article ↩
There is certain logic to any Facebook acquisition given the current stock price. The current market valuation of $156 billion implies significant revenue growth on an annual basis far greater than simply converting desktop revenue streams to mobile ones; if you assume the stock price will decrease in the future, then making largely stock-based purchases makes a ton of sense. Moreover, Zuckerberg is highly incentivized to spend Facebook’s money; he only owns 28% of that money, but has 100% control of Facebook – and of whatever is purchased.
So why not buy an option on what could be the next platform? That is Fred Wilson’s argument:
But the roadmap has been clear for the past seven years (maybe longer). The next thing was mobile. Mobile is now the last thing. And all of these big tech companies are looking for the next thing to make sure they don’t miss it.. And they will pay real money (to you and me) for a call option on the next thing.
Our mission is to make the world more open and connected. For the past few years, this has mostly meant building mobile apps that help you share with the people you care about. We have a lot more to do on mobile, but at this point we feel we’re in a position where we can start focusing on what platforms will come next to enable even more useful, entertaining and personal experiences.
I have two very significant problems with this:
Buying WhatsApp was the first step in making Facebook competitive in the messaging space, but the job is not even close to being done. When I wrote Messaging: Mobile’s Killer App I barely mentioned WhatsApp simply because it is barely competitive with the platform that LINE and WeChat are building; for most users, it’s simply free SMS, and if Zuckerberg thinks Facebook is home safe in mobile, particularly in Asia, he is sorely mistaken.
More significantly, while Oculus’ technology is by all accounts incredible, I, quite strongly, don’t believe it is what is next for general purpose computing.1
In this regard, perhaps the most pertinent article I’ve written wasn’t about Facebook at all; it was about Apple, and their new digital hub. I argued that Apple is positioning the iPhone as the center of your digital existence, with a potential iWatch as an extension of that, and, perhaps over time, the future hub.
Setting aside implementation details for a moment, it’s difficult to think of a bigger contrast than a watch (or ring) and an Occulus headset that you, in the words of Zuckerberg, “put on in your home.” What makes mobile such a big deal relative to the PC is the fact it is with you everywhere. A virtual reality headset is actually a regression in which your computing experience is neatly segregated into something you do deliberately.
The power of computing, at least in my world view, was best articulated by – who else – Steve Jobs years ago:
What is so powerful about this analogy – that the computer is a bicycle for the mind – is that it elevates the humanity of a desired action, in this case transportation, and inserts the computer as an aid. This is exactly what the iPhone and the smartphones that followed have done for people: instead of a computer being a destination, it’s something that is always with us, ready to call up a map, or a restaurant recommendation, or simply fill time with a flapping bird. To put it another way, mobile is a big deal not because we use computers more, but because a computer is with us in more places.
Envisioning a future in which Oculus’ technology is the dominant platform is diametrically opposed: it’s a reality where humans retreat from day-to-day activities in favor of computers. This idea – a life lived in computers – is something that appeals to the technically predisposed; who among us spends all day in front a glowing screen, and then goes home to do the exact same? I’m sure Zuckerberg is in that boat. But it’s a much smaller boat than many technologists realize.
For most people, computers are a means, not an end. Computers help them create music, or write novels, communicate, wayfind, or hookup. To use Jobs’ analogy, it’s not that people want to ride a bicycle for a bicycle’s sake, but because they want to go from Point A to Point B; offering such a person a full-featured massage chair simply misses the point.
Zuckerberg’s biggest strength is his willingness to adjust and adapt, as seen by Facebook’s mobile pivot. This acquisition, though, suggests that pivot was rooted more in a response to the facts on the ground than it was in a fundamental appreciation of why smartphones are the best bicycle yet, and that is concerning.
Newspapers are held up as an irreplaceable tentpole of a free society, especially by the journalists who work at them, but the people who actually started our most august institutions had a rather more pragmatic view: they saw a great opportunity to make money.
Consider the New York Times, widely considered one of if not the best newspaper in the world. According to the History of the New York Times:
One day early in 1851, Jones and Raymond [the founders of the Times] were walking across the Hudson on the ice when Jones observed that he had heard that The Tribune had made a profit of $60,000 — in those days an enormous sum — in the past year. This renewed Raymond’s enthusiasm, and before they reached the other shore he had obtained Jones’s promise to join him, if the re-demption bill passed, in the establishment of a new daily in New York. The bill did pass. Jones closed up his business, and he and his business associate, E. B. Wesley, prepared to put their money, with Raymond’s experience, into the new venture.
And, for 150 years afterwards, newspapers were fantastic businesses, not just for Jones and Raymond. Understanding why, though, explains why the modern newspaper, with a few possible exceptions (such as – hopefully – the Times), is doomed.
Ethical Wall = Value Wall
Journalists pride themselves on an ethical wall1 between the editorial and business sides of the newspaper. This, in theory, allows the journalist to pursue the “truth”, without concern for undue influence. As far as I know, this is nearly universally accepted as a good thing. It’s also a big red flag, at least if you are someone like me who is interested in how businesses are built.
The problem with this arrangement is a familiar one: the end user is the product, not the customer, no different than advertising-based businesses on the web, such as Google or Facebook. While this sort of division usually inspires concern that the quality of the end-user product will suffer, the opposite is also the case: it doesn’t matter how good the end-user product is if the money-making side of the business isn’t in good shape. This is exactly what is wrong with newspapers, and why, to journalists especially, the demise of newspapers feels like such an intractable problem: the quality of their work is mostly irrelevant to the financial well-being of their employer.
Previously, advertising channels like newspapers or television channels were the only means to a captive audience. For example, if you wanted to reach those living in Chicago, the Chicago Tribune or Sun Times were your primary options. This proved highly lucrative for those in the middle; their job was to create compelling content to ensure customers bought their product, which was in turn laden with advertising, from whence they made most of their money.
The old advertising model involved a captive audience; a middle-man needed only to deliver content
The Internet has changed this in a few fundamental ways:
On the Internet, consumers are no longer captive. I have an effectively infinite array of choices for news, entertainment, etc., meaning the content that attracts me must truly stand out
The infinite array of content = an infinite amount of advertising inventory, destroying its worth
The nature of Internet advertising makes it possible to gather much richer data about consumers than was ever possible offline
On the Internet, those in the middle have to deliver superior content and also collect superior targeting information
This has made life in the middle much more difficult, particularly for old-school advertising middlemen like newspapers. Commanding top rates depends not only on capturing consumers versus infinitely more competitors, but also knowing more about those consumers than anyone else. Targeting information is the new scarcity in advertising. It is the only way to sustainably increase average revenue per user.
Let me be more blunt than I was in the original article: life is not “more difficult” for traditional newspapers; it’s unsustainable. They don’t have the best content, it’s not personalized, and they really don’t know anything about most of their readers.
“But [Insert Newspaper Name Here] has great journalists! They’ve won Pulitzer Prizes! And our democracy needs newspapers!” Unfortunately, advertisers don’t, and newspapers are paying the price for having long ago divorced the cost of their content from the value readers place upon it. To put it another way, it’s not that “the Internet has unbundled advertising from content creation,” it’s that advertisers (rightly) don’t give a damn about journalistic ideals. It is incredibly tiring to hear newspaper defenders talk as if advertising dollars are their god-given right, and that Google and Facebook are somehow stealing from them, when in reality Google and Facebook are winning in the fairest way possible: providing better value for the advertiser’s dollar.
The Internet Upside
Throughout this series, I’ve been very careful about separating the “news” from “newspapers.” The Internet has killed the latter, but is the impetus behind a new golden age for the former. Crucially, that golden age is not only for readers, but writers, too. The Internet provide three huge advantages over newspapers:
Distribution is, for all intents and purposes, free. WordPress, which powers most blogs (including at many newspapers) is open source,2 and hosting is extremely cheap. With minimal effort and with no support your writing can be published.
The addressable market – everyone with an Internet connection who can read the writer’s language – is multiple orders of magnitude larger than that of any traditional newspaper
The potential reach of any given post is equal to the addressable market, thanks to social networks like Twitter, Facebook, and even email
Remember how the New York Times was started as a means of making money? After the first year the paper had a circulation of 26,000 in a city of over half a million, but had incurred up-front capital costs of $50,000, and first-year expenses of $78,000 (In 1851 dollars; the modern equivalent would be $1.4 million and $2.2 million respectively). Compare that to this blog (which, by happy coincidence, turns one year old tomorrow, making this comparison timely): FiveThirtyEight and the End of Average, the first article in this series, has been read by over 30,000 people; meanwhile, I’ve spent less than $2,000. More readers, way less money.
You may consider the comparison unfair – an entire newsroom putting out a daily edition as compared to a solo blogger posting one article – but the unfairness is the point. No one shared my article because it was from Stratechery, but then again, no one shares an article today just because it’s from the New York Times; all that matters is the individual article and its worth to the reader and potential sharer. As a writer, this is amazing. When it comes to reader attention, I am competing on an equal footing with The New York Freaking Times! Unfortunately for The New York Times, when it comes to making money they’re competing with Google and Facebook. Most distressingly, though, when it comes to costs, they’re competing with the last 150 years. Everything from printing presses to sales and marketing is deadweight if advertising is not a sustainable model.
Business Models of the Future
The reason why I find business models so fascinating is because your business model is your destiny; newspapers made their bed with advertisers, and when advertisers left for a better product, the newspaper was doomed. To change destiny, journalists need to fundamentally rethink their business:
More and more journalism will be small endeavors, often with only a single writer. The writer will have a narrow focus and be an expert in the field they cover. Distribution will be free (a website), and most marketing will be done through social channels. The main cost will be the writer’s salary.
Monetization will come from dedicated readers around the world through a freemium model; primary content will be free, with increased access to further discussions,3 additional writing, data, the author, etc. available for-pay.
A small number of dedicated news organizations focused on hard news (including the “Baghdad bureau”) will survive after a difficult transition to a business model primarily focused on subscriptions, with premium advertising4 as a secondary line of revenue. This is the opposite of the traditional model, where advertising is the primary source of revenue, with subscriptions secondary.
This transition will be a painful one: the number of traditional journalists and newspapers will decrease dramatically. Moreover, those that succeed will need to have a much expanded skillset from journalists of yore, including basic website management, self-promotion, business skills, speaking ability, etc. (teaching these skills is an important opportunity for journalism schools). What is sure to be most frightening – or exciting, depending on your outlook – is that the market will, for the first time in the history of news, be the ultimate arbiter of what writers are worthwhile.
I know that last sentence sent chills down the spine of many a journalist and many a reader; you believe that people only care about the popcorn, not the movie. That no one will cover the local school board, or the Crimea. If you’re nodding your head, then I have a challenge for both of you:
For the journalist, do you believe that your work is valuable? Then start a blog, and start experimenting with business models. Go door-to-door or start a kickstarter. If you think it’s hopeless, then get out now. There will be a few big winners, but it won’t be you.
For the reader, how often do you visit the New York Times or the Wall Street Journal? Do you pay? Do you love tech? Well, then, have you even considered trying out The Information? It’s exceedingly easy to sit on the sidelines laughing at journalists freaking out about the end of the newspaper, but if you always go for free you will, eventually, get exactly what you pay for.
I don’t think the future of news is an easy problem; my solution, such that it is, entails the death of journalism as we know it (i.e. employed by newspapers). But that’s exactly how new business models are born: a thousand new flowers in the burnt-out forest of what no longer works.
This is commonly called a Chinese Wall, but the term strikes me as an unfortunate one. Its origins are unclear↩
Disclosure: I work for Automattic, which contributes to WordPress and offers WordPress hosting at WordPress.com ↩
That’s very true; those same people – and there are a lot of them – didn’t read the news in a newspaper either. Instead they read the Style section, or Sports, the comics or Dear Abby. It doesn’t really matter though – the same principle of the best killing the average still applies. What is Buzzfeed if not funnies for grownups?
Even that, though, undersells what is happening: it’s not only that the Internet lets you find the objectively best content, but that it also lets you find the subjectively best content based on your interests.
But the control of distribution that was so profitable IRL hasn’t ended online. It just moved, passing from newspapers, TV stations, and the post office to the companies in Andreessen’s portfolio, which happen to have zero cost of content: Google, Facebook, and Twitter (plus the ISPs).
Google’s gross profit margins were 57 percent last year and Facebook’s were 76 percent, which is just bananas. Gannett at the peak of its labor-cutting and advertiser-milking could never have dreamed of those kinds of margins.
Google has 67 percent of the search market. It alone hauls in 41 percent of all online advertising in the entire country.
And why shouldn’t it? The entire premise of Google is that it finds exactly what I am looking for. The potential of Twitter is that it can be perfectly tailored to my interests. A newspaper designed to appeal to the largest cross-section of people with a bundle that includes everything from international news to the horoscope is much, much less likely to have exactly what I’m looking for, and only a small percentage of what it has will be close.
It’s interesting to map the demise of newspapers against the evolution of communication on the Internet:
Stage 1 was simply moving offline content online. This let anyone anywhere access the objectively best, like the New York Times. This decimated a lot of local newspapers, like the Wisconsin State Journal (per my last post)
Stage 2 was the introduction of user-generated content broadly, and social specifically. This dramatically increased the range of content available, even as it made it easier to find content subjectively better for any one person. This is when even the objectively best newspapers really started to feel the pain
Stage 3 is the mobile and contextual stage, highlighted by the rise in messaging. This is about delivering content that is not just personalized but contextually appropriate to my specific situation. What chance does an industry based on broad reach and the idea of daily editions have?
In case you’re wondering, the most-common objection to FiveThirtyEight and the End of Average was that I didn’t address the demise in advertising. That was intentional; while I plan on talking business models – and it’s an important topic – I think that people in the news industry are too quick to attribute their problems to ads, and too slow to understand how incompatible the Internet is with their definition of a newspaper. Newspapers may be screwed, but we can’t start fixing news until we understand what we’re trying to save, and what is simply a relic.
Just a few minutes ago, Nate Silver’s new FiveThirtyEight site launched. While it’s not known how much ESPN is paying Silver, it’s certainly a substantial amount, especially when you consider 20% of visitors to the New York Times stopped by Silver’s blog.
Silver’s FiveThirtyEight is one of a growing number of personality-driven sites and blogs, including Ezra Klein and Vox, Andrew Sullivan and his eponymous blog, and Silver’s colleague at ESPN, Bill Simmons of Grantland. All three are successful because of the Internet, their readers (including myself) love them, what’s not to like?
The ongoing death of the newspaper is, particularly among newspaper folks, attributed mostly to the loss of advertising dollars. For example, writing in response to Marc Andreesen’s bullish tweets about the future of news, Ryan Chittum wrote at the Columbia Journalism Review:
The existential problem for the news is that the Internet has unbundled advertising from content creation. The new digital monopolies all have hundreds of millions of people creating free content for them. That’s where the big profits are. Oh, sure, there are major differences between the old newspaper monopoly distribution model and the digital one. But the similarities are greater.
The equivalent of Google, Facebook, and Twitter in the pre-Internet days would be a newspaper that shut down its newsroom, kept the ad department (though replacing much of it with robots), and printed stuff other people wrote. Today, Facebook’s got your weddings, baby announcements, and soccer pictures. Twitter’s got your breaking news. And Google’s got your stock listings, sports scores, news, recipes, etc. Oh yeah, and Craigslist has your classifieds.
The problem with Chittum’s analysis – and why I think he missed Andreesen’s point – is, ironically, his choice of words. “News” does not mean “newspapers,” and while the latter is surely dead, the former is, for readers anyway, entering a golden age.
My father has always subscribed to the paper; The Wisconsin State Journal, specifically, which makes sense, given that I grew up in Madison. As far as newspapers go, the Wisconsin State Journal that I grew up with was probably about average, right in the middle of the bell curve:
Pre-Internet, some papers were great, some were terrible, most were average.
Long a news hound, I read that paper cover-to-cover throughout high school, and, when I headed off to college, marked the occasion with a subscription to the New York Times. I was moving up in the world.
Today, though, I don’t subscribe to the Times, and I only read an article in the Wisconsin State Journal when I’m visiting my parents and forget to bring my phone into the bathroom. Instead I get most of my news via Twitter, and it’s amazing. Take, for example, this piece I read yesterday about “anonymous” apps like Secret and Twitter: it was posted on Medium, a site built on the idea that nothing matters beyond the content of an individual post, and it was probably the best thing you’ll read on the subject. Over the last 24 hours I’ve also enjoyed this tech piece at Daring Fireball, this basketball piece by Zach Lowe at Grantland, this literary piece from the Guardian, and this culture piece in the New York Times.
The net result is that my news consumption looks a lot more like a power curve than a bell curve:
Today I can afford to read only the best, regardless of where it is published
Most of what I read is the best there is to read on any given subject. The trash is few and far between, and the average equally rare.
This, of course, is made possible by the Internet. No longer are my reading choices constrained by time and especially place. Why should I pick up the Wisconsin State Journal – or the Taipei Times – when I can read Nate Silver, Ezra Klein, Bill Simmons, and the myriad other links served up by Twitter? I, and everyone else interested in news, politics, or sports, can read the best with less effort – and cost – than it ever took to read the merely average just a few short years ago.
Nate Silver’s manifesto for his new site is 3500 words long, meaning it would take the average adult just under 12 minutes to read. That 12 minutes is then gone forever, a bit of attention taken from whatever other activity said reader would have otherwise consumed, and instead gave to Nate Silver. That is why Nate Silver is so valuable.
The implication of my news consumption being dominated by the tall skinny part of the power curve is that those who can regularly appear there – the best of the best – are going to win the zero sum game for my attention. And, for that, they will be justly rewarded.
What then, though, of the tens of thousands of journalists who formerly filled the middle of the bell curve? More broadly – and this is the central challenge to society presented by the Internet – what then of the millions of others in all the other industries touched by the Internet who are perfectly average and thus, in an age where the best is only a click away, are simply not needed?
This is the angst that fills those in the news business, and society broadly. The reality of the Internet is that there is no more bell curve; power laws dominate, and the challenge of our time is figuring out what to do with a population distribution that is fundamentally misaligned with Internet economics.
Earlier this week Samsung, and I’m quoting the headline of the press release, “Unveil[ed] Comprehensive, Lifestyle-Focused Galaxy Gifts Package for Next Generation Galaxy S5”:
Samsung Electronics Co., Ltd. today announced its collaboration with 16 of the world’s leading mobile content and service providers to offer Galaxy S5 users more than $600 worth of exclusive, pre-paid and discounted subscriptions. From fitness to news to productivity apps, the Samsung Galaxy S5 comes with meaningful rewards, to make the Galaxy S5 experience even more enjoyable and productive…1
Designed for what matters most to consumers, the Galaxy S5 is redefining how technology innovation enhances everyday life by providing a refined experience focused on the most essential features for day-to-day use. Samsung’s Galaxy S5 combines an advanced camera, the fastest network connectivity, dedicated fitness tools and enhanced device protection features so consumers can stay fit and connected in style.
I would love to know in what direction the money is flowing with these deals:
If Samsung is getting paid, it’s basically stealing from the PC OEM playbook; most of the profit in PCs comes from so-called “crapware,” and Samsung is certainly feeling margin pressure in its smartphone business
If Samsung is paying, that’s even more telling – they’re effectively trying to buy differentiation. This, too, has precedent: Samsung has used its cash position very effectively for advertising, spiffs for salespeople, etc.
Regardless, both scenarios highlight Samsung’s increasingly vulnerable position in smartphones. So does the fact that Samsung’s American business hired a former P&G VP as vice president of marketing strategy and operations. P&G is the king of consumer packaged goods (CPG), with well-known brands like Tide, Pampers, and Gillette. That business is all about block-and-tackle marketing2 and brand-building such that you can sell a relatively undifferentiated good – like laundry detergent, diapers, or razors – at a premium. Sound familiar?
Were every smartphone in the world Android, I’d feel a lot better about this strategy; there absolutely are consumers who buy based on brand and/or value the small bits of differentiation provided by the higher-cost option. Unfortunately for Samsung, Apple also makes smartphones, and they have effectively skimmed off all the customers who care about such things. The number of people who both prefer Android and care about brand and cutting-edge tech is only going to decrease as the delta between a $650 S5 and a $200 Chinese brand diminishes. Expect the margin pressure to continue.
The companies involved: RunKeeper, MapMyFitness, Skimble, Lark, Paypal, Wall Street Journal, Bloomberg Businessweek+, LinkedIn, Cut the Rope 2, Flick Dat, Box, Dropbox, Bitcasa, Blurb, EasilyDo Pro, and Evernote ↩
Non-flashy marketing basics. For P&G, think things like coupons, direct mail, store displays, etc. ↩
